Money for Muscle

Feature Article from Hemmings Muscle Machines

This just in: Cut-rate financing doesn't exist solely for the purpose of moving moribund metal like the Buick Century or Mercury Sable when the dealers are trying to clear out their inventories of these dogs. Much more desirable stuff, even a near-perfect restoration of Sixties performance, can be bought on someone else's nickel through a competitive marketplace that offers loans specifically for collector-vehicle purchases-at least for now. We'll get more deeply into that caveat shortly.
Even though public lending advertising aimed at car collectors is a relatively recent development, specialty financing of that sort has existed for the better part of the past two decades. Ambitious money specialists realized long ago that some sort of market likely existed beyond the droll drill of setting up a payment deal at your local new-car showroom, a dreary process lampooned in the DiTech.com commercials.
In the ensuing years, the collector-vehicle lending market has evolved and defined itself. Most industry experts believe the universe of people looking to finance the purchase of muscle and other specialty cars approaches four million. For a lot of them, borrowing the money not only improves their own cash flow by avoiding the sudden suctioning of thousands from the old checking account, but it also allows them to buy more car; say, step up to a Tri-Power GTO from a four-barrel Le Mans 326.
"Between classic, antique and muscle, we're probably making more than 5,000 loans a year," said Joe Meldon, vice president of J.J. Best Banc & Co. of Chatham, Massachusetts, one of the leading firms in the collector-vehicle lending industry, which began as a spin-off of a mortgage company. "This is a generational thing. The person who is age 50 wants to drive the cars he knew as a teen-ager, and that's a big implication. The muscle car part of this business is going up and up and up. We're seeing that in the whole spectrum of muscle. All the Hemis and 440 cars have just skyrocketed, so now it's the Firebirds, the Novas, the lesser cars that are getting stronger."
If you're thinking about using borrowed money to finance a muscle car purchase, now is unquestionably the time to jump into the market, because the prices of the cars themselves, and the money to pay for them, are both clearly about to rise-about to rise!? Muscle car prices have been climbing in full afterburner for a good five years now. It's the cost of financing them, which has been ridiculously cheap in recent years, that will almost certainly rise steeply in the next few years.
Industry-wide, the most elemental consideration in the cost of borrowing money is the Federal Reserve Bank's funds rate, which is the amount of interest the Fed charges member banks in the United States for "overnight" short-term loans. A rash of inflation that followed the 1991 Persian Gulf War led the Fed to nearly double the rate and tighten the money supply. Since the dot-com bust, the Fed's Open Market Committee has repeatedly cut the rate in small increments, dropping it to a historic low of four percent. That, in turn, led to worries by some economists about deflation, where price devaluation causes business profits to fall. In early May, the Open Market Committee agreed to leave the rate unchanged, but dropped their long-standing pledge not to raise it in the future.
Many finance experts believe the funds rate will be increased at the committee's next meeting in August. Lenders interviewed by Hemmings Muscle Machines agree that deflationary jitters, combined with runaway upper-bracket tax cuts, the Iraqi entanglement with no end in sight, anti-terror spending and a federal budget deficit exploding past $500 billion mean that cheap, ultra-competitive lending is about to have the brakes put on it.
"We've had a temporary honeymoon with interest rates that just can't last," said Roger Kirwan, chairman of Woodside Credit of Newport Beach, California. "We're looking at a low of 4.5 percent today versus probably 6 percent three years from now. You would be much better off to get into the market and finance now, because the price of the cars is going up and the cost of the money to buy them is going to be going up, too."
Kirwan founded Woodside Credit in 2003, coming into the collector-vehicle lending industry with close to 40 years of experience in developing innovative programs for financing specialty purchases. Once a part owner of J.J. Best, Kirwan founded Ganis Credit in 1980, and in doing so, pioneered the establishment of long-term financing for recreational vehicles, with loans extended over 20 years.
"Collector-car financing looked like a natural to wed my experience with," he said. "I'm a credit person, and that's the reason for which Woodside was founded."
There's at least one clear parallel between financing your 1969 GTX and your grocery-schlepping minivan. In both cases, a very common payback period is 60 months. At that point, though, the two lending marketplaces lose their similarities.
"We're not like the companies who finance these sewing machines that people drive around in today," Meldon said. "These days, the issue of credit-worthiness for the new-car buyer is practically nonexistent. The dealers and the car companies just want to move the cars. Here, we call the car an appreciating asset, and we look at the loan as a form of disposable income."
Many firms that specialize in collector-car financing are capitalized by larger lenders, including national banks such as Bank One or J.P. Morgan Chase. The capital is extended on what is known as a "prime plus" basis, meaning the collector-car lender is charged a higher percentage than the federal funds rate. The lender's client is charged a higher rate still, from which the lender realizes his profit.
The rate charged to the borrower depends greatly on his or her perceived ability to repay the loan. As Kirwan put it, "Here, we have no prejudice either for or against a muscle car when it comes to making a loan. We have a very strong prejudice toward finding good customers and giving them the credit they need. We review their work history, credit history, credit score, asset base, and we ask, 'Does this purchase fit what you can afford at this point in your credit cycle?' If you tell us the car is worth $100,000, and you're willing to pay $110,000 to have it, we'll go with you."
Woodside Credit generally calls for repayment of loans in the $20,000 range over five or six years, and up to 12 years for six-figure totals. The interest rate to the borrower ranges six to seven percent, with Kirwan explaining, "We're an A-quality lender, and we charge A-quality rates."
During the months of stable, low interest rates, J.J. Best Banc's rates typically ranged between 5.49 and 8.99 percent, depending on the applicant's credit-worthiness and the amount borrowed. One test that is frequently applied by lenders examines the applicant's debt-to-income ratio, and an application will commonly be rejected if the ratio is above 40 percent. Meldon said the typical new J.J. Best Banc client asks to borrow $20,000, but said one customer in the Midwest who purchased a total of 24 cars was approved for loans totaling $96,000, $120,000 and $200,000.
Another consideration is whether the lender can secure the vehicle's title while the loan is still outstanding. Some states, including Vermont, don't assign titles to older vehicles being financed. As a result, loaned greenbacks are hard to come by in the Green Mountain state.
Perhaps the biggest difference between consumer and collector financing is the level of customer service that is typical in the market niche. Most lenders offer online applications, and many partner with auction firms so would-be buyers can get credit at the event. J.J. Best Banc has worked with the Kruse, ICA and Silver auctions. It places loan officers on site who can approve credit within 10 minutes, and will even write the check to the auction if the borrower bids successfully on a car. Additionally, the firm works with a network of 1,500 agents nationally who verify a car's condition, ownership status and the absence of any liens against it before credit is approved.
Like Kirwan, though, Meldon suggested that the cheap credit party is likely to end soon, and that today's rates may not be seen again for a long, long time.
"It's tough enough now to predict what interest rates are going to be three months from now, much less three years," he said. "But even in an election year like this, I'm sure the rates are going to start to ratchet up."

This article originally appeared in the July, 2004 issue of Hemmings Muscle Machines.